State governments: A decade of financial crisis

November 2, 2000

The biggest casualties of the decade-old liberalisation programmes and the emergence of regional political parties have been state finances. Neglect and a lack of accountability have played havoc with their coffers and the damage is increasingly obvious in recent years.

So bad is the situation that one tends to forget it was only a little over five years ago that several states and state-controlled organisations presented a completely different picture. Some municipal corporations were healthy enough to be considered fit to raise public funds through Municipal Bonds to finance infrastructure projects. The Bombay and Ahmedabad Municipal Corporations managed a good credit rating in anticipation of raising such funds.

In fact, a couple of years into the Narasimha Rao-Manmohan Singh liberalisation programme, Maharashtra, Gujarat and a few other states in the south seemed poised to engineer a dramatic transformation, which was way ahead of the rest of the country.

Let us look at Maharashtra. A decade ago, Advantage Maharashtra was probably a better slogan with which to attract foreign investment than Advantage India. It was already the favourite destination for Indian industry, it was financially sound, had good labour productivity, a professional bureaucracy and had relatively low corruption levels. It also had good roads, was well connected by rail, was power surplus and, a bigger rarity, its power distribution utility -- the Maharashtra State Electricity Board was profitable.

Mumbai was the magnet which attracted investment to Maharashtra. It was the financial capital and headquarters to most leading banks and financial institutions. The thriving film and music industry was another big draw. Best of all, Mumbai was professional and had an excellent public transport system which allowed it to function like a well-oiled machine. So much so that its attraction was not diminished by the fact that its property market remained in the clutches of the builder-underworld-politician nexus.

Top global management consultants were quick to spot both potential and opportunity in helping Maharashtra take advantage of economic liberalisation. McKinsey & Co produced a comprehensive report assessing the strengths of the state, its infrastructure requirements and a blueprint for getting numerous government institutions to work more effectively together. It prepared this report almost free of cost.

While McKinsey's suggestions for structural reorganisation were probably too drastic to ever make it past entrenched vested interests – even the good parts of the report were simply consigned to limbo without so much as a public debate. The momentum to sell Maharashtra as an investment destination, as distinct from the rest of the country, was soon lost. All this happened during the Sharad Pawar-led Congress government – the first signs of an aborted takeoff.

The next ruling coalition (the Shiv Sena and Bharatiya Janata Party) roped in Arthur Andersen to organise an international jamboree to bring foreign investment into infrastructure projects. Its slogan was Advantage Maharashtra. Nothing came out of it either. The state was too engrossed in messing around with the Enron power project at Dabhol. It first cancelled the project alleging corruption and later re-negotiated it at thrice the size with virtually no reduction in costs and enormous damage to its reputation. Naturally, it no longer had the credibility to negotiate projects for water transport, tourism, airports and other road-rail infrastructure projects which were on offer.

There is now a third coalition government ruling the state and this time it is already in a desperate financial mess. When its finance minister Jayant Patil tried to rope in assistance from management consultants at a recent seminar in Mumbai, a former chief of Arthur Andersen spoke publicly about his bad experience with Advantage Maharashtra. As head of another management consultancy, he said he was still willing to commit his time and expertise, but only if the government was willing to assure implementation.

This time though Maharashtra is in no position to mention investment. It is so bankrupt that it is struggling to pay salaries to government employees and is bereft of ideas about how to cut costs or raise fresh funds. It has even done the unthinkable and proposed a 10 per cent salary cut for government staff after having refused to pay bonus.

The situation in the Bombay Municipal Corporation is even worse. It is not only bankrupt, but nearly 75 per cent of its revenues are pre-empted towards employees salaries with just the balance left over for providing public services. The BMC is completely in the grip of its powerful employee trade unions which has routinely engineered salary hikes and bonuses by holding the city to ransom by stopping work. Last month though, the employees made the mistake of cutting off water supply and finally enraged the long-suffering public so much that they resorted to riots and road blocks all over the city.

It is the same story at the once-profitable power utility. Not only is the MSEB in the red, but it seems clueless about how to recover over Rs 4,000 crores of arrears, restructure the organisation or cut subsidies. Having been forced into a commitment to buy extremely expensive power from Enron its cost of electricity has soared, yet it continues to be bullied into negotiating other power-projects which make little commercial sense.

The situation in other states is, in more awful – Bihar and Orissa are certainly the worst examples, but even progressive states such as Andhra Pradesh and Karnataka are wracked by their own peculiar controversies. Several factors are responsible for the rapid degeneration of state-owned undertakings and the financial bankruptcy of states. But the biggest factor is probably the changing political equations at the Centre and the states. It is probably the price we are paying for dominant regional parties comprising mainly defectors from the national parties with transient loyalties. They also have a new and unsatiated appetite for making money and are unconcerned about the long-term consequences of enfeebling the economy.

But it is no use blaming politicians alone. If politicians get away with such brazen looting of the exchequer it is only the fault of the Indian people who let them get away with it.